Nominee Says He Approves Of Fed Policy

Federal Reserve Board nominee Manuel H. Johnson said yesterday he is in general agreement with current Fed policy and indicated he sees no need for the central bank to try to lower interest rates aggressively.

Some observers have been expecting Johnson to favor a substantial easing of monetary policy once he is confirmed by the Senate and joins the board.

Asked in an interview if he agrees with the way the central bank is pursuing monetary policy, Johnson replied, "Yes, I am. I've been in agreement all year.

"I agreed when they rebased their targets. Given the information available, I feel they acted responsibly last year. They did what I would have done pretty much.

"There was a little more room for ease a little bit late last year, but the economy seems to be picking up steam without going much further. It's still possible if velocity continues to show weakness, the Fed could pursue an easier policy," he said.

The Federal Reserve last summer moved the base from which it measured money growth for purposes of its targets from the fourth quarter of 1984 to the second quarter of 1985. The shift had the effect of accepting rapid growth in the first half of the year in M1, the most closely watched money measure. M1 includes currency in circulation and checking deposits at financial institutions.

The velocity of money to which Johnson referred is the speed with which money turns over in the economy. It usually is expressed as the ratio between money and current-dollar GNP.

When velocity falls, as it did during 1985, a greater increase in money is needed for a given rise in GNP. Normally, velocity increases and Fed policy makers usually assume such an increase in setting their targets for money growth.

Johnson, currently Treasury assistant secretary for economic policy, also said that he doesn't think that the economy's recent improvement will cause interest rates to rise.

President Reagan named Johnson to replace J. Charles Partee, whose 14-year term expires on Jan. 31. Johnson's remarks yesterday gave some of the first indications of how he views current Fed policy.

Some Fed observers have speculated that Johnson's appointment, along with that of Kansas economist and banker Wayne Angell to fill a vacancy on the board, may shift the balance among Fed policy makers toward an easier policy stance. Two other Reagan appointees to the board, Vice Chairman Preston Martin and governor Martha Seger, regularly pushed for a somewhat easier policy last year.

Other Fed watchers, however, have suggested that it is too early to tell what positions the two men will take after their expected confirmation by the Senate. The Senate Banking Committee will hold confirmation hearings for them Tuesday.

Earlier in the day, Johnson told reporters that he endorsed the Fed's approach in shifting its monetary targets when the usual link between money growth and economic growth breaks down, as it did in 1985.

After speaking at a Cato Institute seminar on monetary policy, Johnson was asked by reporters whether he favors setting targets for money supply growth as a way of reaching its ultimate goals of economic growth and inflation -- the method the Fed currently uses -- or using an approach linking monetary policy to the price of one or more commodities, such as gold.

"All I'm saying is right now we have targeted monetary aggregates," Johnson responded. "I'm not convinced that we can't work within the current framework.

"You can make a case for current policy in dealing with current" problems of a drop in the velocity of money, which has made it difficult for the Fed to adhere to its monetary targets, he added.

Johnson said that so far there has been no evidence that the drop in velocity has "created a great economic shock to the economy" and that there is some evidence that the the Fed's response to the slowdown in velocity "wasn't that bad." Later, in a telephone interview, he went further to say, "They did what I would have done pretty much."

Recently, Beryl Sprinkel, former Treasury undersecretary and now chairman of the Council of Economic Advisers, said that the Fed's tolerance of rapid money growth in an effort to revive the sluggish economy would lead to inflation later on.

At the same time, other administration officials have complained that the Fed isn't pumping enough money into the financial system to allow faster economic growth.

If the Fed had been rigid in following its targets last year "the results would have been pretty scary," Johnson said. "I'm not saying we can fine-tune the economy , but at least if you set a target, you have to be able to adjust to these shifts" in velocity, which "may from time to time require shifts in aggregate money supply targets."

Johnson said that recent economic indicators suggest an improvement in the economy. "The economy looks real good right now," Johnson said. "The data clearly are indicating the economy at least is moving out of the slower pace of 1985."

However, Johnson said that the speedup in economic growth does not necessarily mean interest rates will rise. He noted that there is still a lot of slack at the nation's factories, utilities and mines and there "need not be any interest rate pressure, from the data so far."